The combination of expected interest rate increases and more subprime borrowers in the consumer lending market will spur delinquency rate rises in 2017 for auto loans and credit cards. TransUnion’s (NYSE: TRU)2017 consumer credit market forecastalso found that serious mortgage loan delinquency rates are expected to drop, while unsecured consumer loan delinquencies are expected to see only a minimal increase next year.

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The consumer credit markets have been functioning extremely well the last few years, but an increase in subprime lending has begun to impact delinquency levels for some industries, specifically the auto finance and credit card markets. On the credit card front, we have seen the percent of subprime accounts reach their highest level since the end of 2010; for auto finance, this figure is now at its highest point since the conclusion of 2013. Our forecast also takes into account an expected 50-basis point aggregate increase in the prime interest rate beginning this December and continuing through the end of next year. The combination of these elements are key drivers of the expected delinquency rate increases.

Nidhi Verma, senior director of research and consulting in TransUnion’s financial services business unit

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Serious Borrower-Level Delinquency Rates for Key Credit Products**

Credit Product

Q4 2012

Q4 2013

Q4 2014

Q4 2015

Q4 2016*

Q4 2017*

PCT Change in Last 5 Years (2012-2017)

Auto Loans

1.15%

1.23%

1.19%

1.27%

1.36%

1.40%

+21.3%

Credit Cards

1.75%

1.60%

1.48%

1.59%

1.71%

1.82%

+3.7%

Mortgage Loans

5.38%

4.31%

3.40%

2.46%

2.21%

2.11%

(-60.8%)

Unsecured Personal Loans

3.93%

4.01%

3.73%

3.62%

3.66%

3.72%

(-5.4%)

*Projections; **Serious mortgage, auto loan and personal loan delinquencies are defined here as those with payments 60 or more days past. Serious credit card delinquencies are defined as those with payments 90 or more days past due.

While delinquency rates are expected to rise for most credit products, mortgage loans will continue their downward trend that has now seen delinquency rates drop every quarter since Q3 2013. Mortgage delinquency rates have declined consecutively for 23 of the last 26 quarters since peaking at 7.21% in Q1 2010.

“The mortgage market has improved dramatically, to a point where it has normalized on a delinquency basis. From an overall consumer credit standpoint, the mortgage marketplace also stands out from other loan types, with far more prime and above borrowers as a percentage of total accounts,” said Verma. “This improved risk distribution, coupled with rising home values, has led to a significant decline in mortgage delinquencies.”

It is important to highlight that the delinquency levels projected for all credit products in 2017, even those that are rising, will remain well below levels observed at the last recession. “These projected increases in delinquency are not surprising, nor are they yet a cause for concern,” said Verma. “Lenders are adjusting their underwriting strategies to maintain a good balance between expected losses, consumer credit access, customer utility and investor returns—and in the end, that balance is a benefit to all parties.”

TransUnion projects the credit card delinquency rate will continue to rise to close 2017 at 1.82%, its highest level since Q4 2011 and a 6.1% increase from the expected Q4 2016 delinquency rate.

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After 22 straight quarters of declines in card delinquency between 2010 and 2015, we observed an increase in the third quarter of 2015. Since then, we’ve continued to observe higher delinquencies. We are keeping a close eye on these rising levels. A moderate increase in card delinquency is natural as more subprime consumers have entered the market. Most importantly, we remain at relatively low levels of delinquency compared to the recession years.

Paul Siegfried, senior vice president and credit card business leader for TransUnion

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In Q3 2016, subprime account volume grew 14.7%, the largest growth rate since TransUnion began tracking this metric in Q3 2009. However, subprime accounts comprised only about 10% (39.6 million) of the 398.5 million credit card accounts in the third quarter of 2016.

The credit card balance per consumer is projected to rise at year-end 2016 and throughout 2017. TransUnion expects the average balance to rise 1.87% from $5,337 in Q4 2015 to $5,437 in Q4 2016. Average balances are projected to reach $5,509 by the end of 2017. “A better employment picture and rising median household income are contributing to an anticipated increase in personal spending, and credit card balances are expected to benefit from those positive economic forces in 2017,” added Siegfried.

From a consumer standpoint, borrowers should be aware that credit card interest rates may rise as a result of prime rate increases. Consumers who carry a revolving balance should plan for their monthly payment amounts to go up. Despite the forecasted payment obligation increase, it is imperative for consumers to continue making at least their minimum due payments on time each month to avoid potential credit score impact, and regularly monitor and manage their credit. More information about consumer credit management can be found at https://www.transunion.com/debt-and-money-management.

The auto delinquency rate is projected to close 2017 at 1.40%, the highest level since 1.59% at year-end 2009. TransUnion expects the auto delinquency rate will reach 1.36% in Q4 2016, a 7.0% year-over-year increase from 1.27% in Q4 2015.

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Greater access to auto loans for non-prime consumers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfolio. An increase in delinquency is the natural consequence of that strategy. If lenders are compensated for the additional risk in the portfolio, a modest increase in delinquency should not disrupt the auto finance market. We do not expect to see a surge in auto delinquency unless there is an economic shock.

Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion

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In Q3 2016 (the latest data available), there were 74.8 million auto loan accounts. Non-prime (VantageScore® 3.0 of 660 and below) accounts grew 7.5% to 25.1 million auto accounts in Q3 2016, up from 23.3 million in Q3 2015.

As the annual growth rate of new vehicle sales is expected to taper and interest rates are expected to rise, TransUnion expects auto sales to still grow, but at a lower rate than experienced in recent years. Growth in average auto balance per consumer is expected to slow to levels last observed in 2011. The average balance is projected to grow at a 2.4% rate between year-ends 2015 and 2016, compared to the 3.1% growth rate between Q4 2014 and Q4 2015 and 4.0% growth between Q4 2013 and Q4 2014. Average auto balances are expected to reach $18,435 in Q4 2016 and $18,840 in Q4 2017.

“Average auto balance growth began to slow at the beginning of 2016, and we expect this more moderate growth to continue through 2017 if wage growth continues,” said Laky.

TransUnion projects serious mortgage delinquency rates to decline slightly in 2017, while average debt levels are expected to rise. The 60-day+ mortgage delinquency rate is expected to decline from 2.21% in Q4 2016 to 2.11% in Q4 2017. Debt levels are expected to rise nearly $4,000 from $194,875 in Q4 2016 to $198,435 in Q4 2017.

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The mortgage market has seen steady improvements over the last several years, and we believe lower unemployment rates, growth in median household income, and rising home values will be the primary drivers for continued strong performance in this sector. The rate at which mortgage delinquencies are expected to decline is expected to slow primarily because the inventory of foreclosure properties has diminished significantly and overall credit performance is stabilizing, as the bulk of consumers recently entering the mortgage market have high credit scores and have met stringent underwriting criteria. The serious mortgage loan delinquency rate also has reached more historically ‘normal’ levels, hence further steep declines are unlikely.

Joe Mellman, vice president and mortgage business leader for TransUnion

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A major driver of lower mortgage delinquency rates is the small composition of subprime borrowers who have a mortgage balance. Of the 66.9 million consumers with a mortgage balance in Q3 2016 (latest data available), only 8.5% were subprime borrowers. This is down from the 8.7% of subprime borrowers of the nearly 67.4 million consumers with a mortgage balance in Q3 2015, and well below the 15.5% seen in Q3 2009 (of a total of 73.0 million consumers with a mortgage balance).

“While increased interest rates will likely curtail refinancing activity materially and be a headwind for purchase mortgage affordability, we still see strong future purchase demand from prospective homebuyers,” said Mellman. “In fact, we believe with improved economic conditions we could see nearly three million first-time homebuyers in 2017, which will prove to be quite beneficial to the industry.”

60-Day+ Mortgage Delinquency Rate and Average Mortgage Debt per Borrower

Q4 2009

Q4 2010

Q4 2011

Q4 2012

Q4 2013

Q4 2014

Q4 2015

Q4 2016*

Q4 2017*

7.16%

6.65%

6.15%

5.38%

4.31%

3.40%

2.46%

2.21%

2.11%

$190,324

$186,488

$185,594

$184,753

$187,228

$187,311

$189,914

$194,875

$198,435

*Q4 2016 and Q4 2017 include projections

Inside the Personal Loan Forecast

TransUnion projects personal loan balances will rise to an average of nearly $8,000 to close 2017, while delinquency rates will remain low. The average personal loan balance is expected to grow 3.24% from $7,729 in Q4 2016 to $7,980 in Q4 2017, the highest level since TransUnion began tracking the metric in Q3 2009.

The personal loan delinquency rate is forecasted to increase year-over-year for the first time since Q2 2014, increasing to 3.66% at year-end 2016 and 3.72% at the conclusion of 2017. Delinquency levels will remain lower than the average fourth quarter reading of 4.18% (2009-2015).

Total personal loan account volume grew 13.2% from 14.29 million in Q3 2015 to 16.18 million in Q3 2016 (the latest data available). In Q3 2009, subprime accounts comprised 35.3% of all personal loan accounts. As personal loans have grown in popularity among prime consumers, subprime account share dropped to 29.7% in Q3 2012 and 27.6% by Q3 2016.

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Personal loans were the fastest growing loan product in 2016. We observed double-digit growth rates across all risk tiers. The personal loan delinquency rate is projected to rise, but remains well below its peak of 5% at year-end 2009. As additional prime and above consumers take on personal loans, the risk distribution of this market has shifted. Prime consumers typically have access to higher loan amounts, driving the average balance per consumer up to another post-recession high.

Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion

For more information about the 2017 TransUnion forecast and to register for a webinar providing detailed projections, please visit www.transunioninsights.com/IIR.

TransUnion’s Forecast

TransUnion’s forecasts are based on various economic assumptions, such as gross domestic product, home prices, personal disposable income and unemployment rates. The forecasts could change if there are unanticipated shocks to the economy, such as if home prices unexpectedly fall. Better-than-expected improvements in the economy, such as precipitous drops in unemployment, could also impact these forecasts.

About TransUnion (NYSE: TRU)Information is a powerful thing. At TransUnion, we realize that. We are dedicated to finding innovative ways information can be used to help individuals make better and smarter decisions. We help uncover unique stories, trends and insights behind each data point, using historical information as well as alternative data sources. This allows a variety of markets and businesses to better manage risk and consumers to better manage their credit, personal information and identity. Today, TransUnion has a global presence in more than 30 countries and a leading presence in several international markets across North America, Africa, Latin America and Asia. Through the power of information, TransUnion is working to build stronger economies and families and safer communities worldwide.